Chancellor George Osborne has claimed vindication for his economic strategy after the International Monetary Fund sharply upgraded its forecast for growth in the UK.

In its latest World Economic Outlook, the world financial watchdog said there were "welcome signs" that the pace of activity in Britain was finally picking up after the global crash.

It now expects the UK to see growth of 1.4% this year rising to 1.9% in 2014, compared to its last forecast in July of 0.9% growth in 2013 and 1.5% next year - its biggest upgrade for any of the G7 nations.

The revisions come just six months after the fund urged the Government to re-think its austerity strategy, with IMF chief economist Olivier Blanchard warning Mr Osborne that he was "playing with fire".

The latest report still says it will take years before economic activity in Britain recovers to pre-crash levels, and it urges the Government to bring forward major public investment projects to offset the squeeze on near-term Whitehall spending.

However Mr Osborne said the latest forecasts showed his strategy was working, although there was still a long way to go.

"I think the overwhelming majority of people now realise Britain was right to tackle its debts, right to hold its nerve and stick with the economic plan," he told BBC News.

"We can see jobs being created in our economy but of course we have still got a long way to go. We are in recovery but we've absolutely got to stick with fixing the things that went wrong with Britain.

"We are investing in Britain's infrastructure, building things like Crossrail, investing in new housing. We are able to do that precisely because we got a grip on the public finances, got a grip on things like welfare costs which were actually out of control."

For Labour, shadow chancellor Ed Balls accused the Chancellor of complacency in the face of the slowest recovery for 100 years and called on the Government to take action to boost growth.

"Despite these welcome changes to its forecasts, the IMF rightly warns that the UK economy will remain below potential for many years. That's why the IMF has repeated its view that the Government should bring forward infrastructure investment now, which could be used to build thousands of affordable homes," he said.

"Instead of more complacency from George Osborne, we need action to secure a strong and sustained recovery, catch up all the lost ground and tackle the cost of living crisis."

In its report, the IMF said: "In the United Kingdom, recent data have shown welcome signs of an improving economy, consistent with increasing consumer and business confidence, but output remains well below its pre-crisis peak," it said.

"Growth is expected to be about 1.5% in 2013 and 2% in 2014, slowly returning to trend in the medium term, but output levels will remain below potential for many years."

The IMF said that with interest rates remaining low, the Government could afford to do more to boost growth through long-term investment projects while sticking to its plan for tackling the deficit.

"In an environment of still low interest rates and under-utilisation of resources, public investment can also be brought forward to offset the drag from planned near-term fiscal tightening, while staying within the medium-term fiscal framework," it said.

While it welcomed the system of "forward guidance" on interest rates adopted by the Bank of England under governor Mark Carney, the IMF said "greater co-ordination" was needed across the newly-established system of regulatory bodies, including the Bank's financial policy committee.

It is essential that regulators are "adequately resourced and operationally independent".

The IMF also highlighted the continuing problems in the eurozone, where economic activity is forecast to shrink by around 0.5% in 2013 after a similar contraction the previous year.

"Risks have become more balanced than six months ago, but still remain tilted to the downside," it said.

"Amid a fragile recovery, limited policy space, and substantial slack, the region could be hit by further domestic or external shocks."